Best ways to finance and selling town houses development

Hi all, Here's my scenario, I am planning to purchase a property that we can developed into 10 townhouses. it already has a rental property on it which will give me about 2.5% return. My plan is to do the development in 2 -3 stages. I might first just develop 2-3 additional town houses first, keep the existing house in place. This way, hopefully I can make the investment from negative geared to positive geared, Once I have more experience and in a better financial situation, I will proceed to build a few more and eventually complete the development. I will then proceed to sell them individually and gradually when market condition is favourable.

Up to this point, I have been mainly invested in existing individual houses and apartments with no previous development experience. I would really like to hear from experienced developers that might have gone through similar stages. I want to hear how you finance the loans for the initial purchase(Company vs individual) for development, what's the pros and cons of doing development in stages vs in one go. whether to keep all the units and sell it gradually over time vs selling it off the plan. Please let me know if the above plan is an appropriate plan for a newbie like me.
Thanks in advance.

 

10 townhouse staged development and this is your first ever project? Any reason you aren't doing something simpler to gain experience?

 

Just that small sites are more expensive when looking at per town houses bases. Plus most smaller sites either don't come with a rentable property or that it needs to be knock down to make way for smaller units.

 

What does the feasibility look like for the deal? What kind of %age return on TDC? Assuing you can pull it off, does it even stack up? Hope your not just doing it to turn a NG site to a positive one without any profit for the risk your taking.

 

Thanks for your reply Leo, in the short term I am just going to build and hold if that make sense. my initial calc, seem that number seem to stack up since the site seem to have just a 10% premium compare to the low density zoned properties so it's like a decent investment. What would be the more significant risk that you are indicating? I assume that once it's positive geared, there's no urgency to sell.

 

Hi Ivan, I am not sure what you mean by 10% premium mate. What total projected costs (site + construction + soft costs) do you have and then what total sales do you project in the current market? What's the profit dollar amount if you were to sell all?

From my own perspective I would not want to undertake any development unless right from the outset I can realistically project a decent profit margin (usually 20-30% gross return on TDC give or take depending on the time factor too) due to all the risks involved. Risks include market changes, builder bankrupt, higher than anticipated site costs, cost blowouts in construction, commercial finance risk eg banks in instances can ask you to lower the lvr during a project, time blow outs and any more.

Just my take on it.

 

10% premium for the development opportunity, say a non zoned house on same amount land cost $500k, this property with the zoned for townhouses with equivalent land content $550k. so even if I don't develop the land immediately, I don't loose all that much compare to the neighbourhood that has no development potential. in regard to the risk, it is still early stages as I have not spoken to any builders yet since there's no detail draft. after getting a town planning report, I am pretty certain it can fit no less than 10 town houses. My gut feeling is that 10% premium for the opportunity seems to be a very good deal regardless if I develop it or not in the near future. what do you think.

 

You could be right and it might be a good deal but tbh unless I know what the numbers are like, it's impossible to know if it's a good deal or not. Just because a site might yeild 10 townhouses doesn't necessarily make it a good deal.

And then if your not going to develop it, how much NG is it and what growth potential are you seeing with your DD? Not trying to sound pessimistic but you need to know these things otherwise you could lose more than you bargained for.

 

The rationale of there being downside protected somewhat by only paying a tiny premium over a single RESI property is sound however it doesn't add up. How are you certain that you can fit 10%? Have you sought appropriate paid for advice regarding this? Such a tiny premium got an additional 9 dwellings is unheard of IMO.

Doing it staged also is sounf, as is retaining the existing property. You've got the basic framework and risk mitigation OK for a start but I would undoubtedly be seeking the advice of experts who can help you with this project. The fees you pay will highly likely be covered in savings from errors being lessened and the project happening quicker, assuming you higher competent consultants.

It's also no shame whatsoever in getting as much assistance as you need and as the project cab afford, while still having enough projected profit. Ultimately the end result of making money is what counts, satisfaction of doing everything would be quickly eroded if it means a 6 year project instead of 3 and no profit instead of a good chunk to bank

 

If you do the 10 townhouses in one stage/one go then you will need to do this via commercial construction lending. Lenders simply have zero funds allocated to commercial construction funding so they are cherry picking the deals.

When I say cherry picking - I mean cherry picking. Experienced developers with several developments at a similar scale under their belt (the developer will need to provide their resume), existing clients of the bank, cat 1 location and development (lenders don't want to touch a 20 unit development in Mascot or Wolli Creek), builder has to be known to the bank, project feasibility has to be at least 25% and the big one is pre sales. If you need to show pre sales then they would need to be watertight exchanges, 10% minimum, limited foreign investor sales, limited investor sales, etc.

You can certainly get funding from private funders and even the 3rd/4th tier lenders like La Trobe but even those lenders (which charge a premium) are cherry picking.

Then chuck in commercial lending costs, such as valuation fees (circa $5k), QS report (circa $5k) and application fee (up to 1.5% of the loan amount).

So strategically you need to look at how you can get the development done in stages. Doing up to say 4 will allow you to do the development via residential funding which is far easier to fund and much cheaper.

With regards to purchasing under a company or individual you really need to sit down with an Accountant and tell him/her what you plan to do, i.e. sell one keep the rest, sell all, etc. Then they can advise you of the best entity, company, trust or individual to do the purchase.

From a finance perspective there are no issues in doing the purchase under a company structure - the only negative is that the negative gearing benefits reduce as you can't negatively gear under a corporate entity. Having said that there may be massive tax implications so don't do the purchase under a individual entity just to allow you to borrow an extra $50k or so.

 

Thanks for the very detail reply guys, I did have a town planning report and it seem that 10 units are no issue. I will probably use residential loan first to complete a couple of townhouses as it is easier to finance. in regard to purchase under a company structure, here's my main concerns.

1. I can't take advantage negative gearing, which means no immediate saving.

2. Company structure might mean more complicated tax return and more expensive accounting fees each year.

3. When selling, there's no 50% CGT discount, which meant I have less profit at the end?

4. Will the bank be more conservative when it comes to assess serviceability ? what kind of % for LVR would i get for a new company with no track record.

5. Will the interest be more expensive as a company structure as oppose to individual?

6. after the completion of the townhouses, I might want to rent it out for the immediate future, it might be an issue to claim depreciation deduction as as negative geared.

7. Do you mind share with me what kind of tax implications if the loan and development are fund under individual? now sure how individual vs business in stacks up terms benefits and risks.


Thank you very much advance : )

 

1. Yes, but any losses can be carried forward by the company.

2. Nothing to worry about in the scheme of things

3. Could be less, but could be more money in your hands in the end. Companies have the ability to retain profits and distribute income at some future date to shareholders in the form of dividends with franking credits.

4. No real difference

5. Generally much the same

6. Nope. The company can claim depreciation.

7. Unlikely a lender would lend to an individual if a company was the owner. You could borrow under other security and onlend to the company.



Perhaps you might want to consider several different structures combined.
An example may be 2 separate companies as tenants in common owning the property.

Another example may be one entity owning and one developing.

 

nope, not appropriate plan for a newbie even if you managed to source finance. You don't have experience, start small, if deals don't stack up, what do you think this means? hint hint....land has risen and you are probably buying at the wrong time of the cycle, easiest way fo developers to lose money

 

Can we do staged development in a MUD that's going to be strata/community titled?

 

Hi Terry,

What's the benefit of one entity owning and one developing?

 

asset protection,
diversion of profits without needing to trigger stamp duty and CGT

 

Is this a viable option for someone who owns the development land as an individual and would then use a company as the developing entity for asset protection and diversion of profits?

 

Yes it could be.